US seeks $19b from Deutsche Bank for misleading buyers of mortgage bonds

A logo of a branch of Germany's Deutsche Bank is seen in Cologne.
A logo of a branch of Germany's Deutsche Bank is seen in Cologne. PHOTO: REUTERS

NEW YORK (REUTERS, AFP) - The US Department of Justice is asking Deutsche Bank to pay U$14 billion (S$19.07 billion) to settle an investigation into its selling of mortgage-backed securities, Germany's flagship lender said on Friday (Sept 16).

The payout would be the largest ever inflicted on a foreign bank in the United States, easily surpassing the US$8.9 billion that the French bank BNP Paribas paid in 2014 for sanctions violations.

The claim against Deutsche, which is likely to be negotiated in several months of talks, far outstrips the bank's and investors' expectations for such costs. While it is yet to become clear what the final payment will be, if it were to be as high as US$14 billion, this would be a severe strain for Deutsche's fragile finances and would likely further rock investor confidence in the bank. "

In a quick reaction, Deutsche Bank said the US$14 billion figure was an opening proposal in settlement talks with US prosecutors, but the bank said it had "no intent" to agree to a sum "anywhere near" the figure.

"The negotiations are only just beginning," the statement said. "The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts."

The US Justice Department declined to comment. The Wall Street Journal earlier reported the department's demands.

In a similar case, rival Goldman Sachs agreed in April to pay US$5.06 billion to settle claims that it misled mortgage bond investors during the financial crisis.

That settlement included a US$2.39 billion civil penalty, US$1.8 billion in other relief, including funds for homeowners whose mortgages exceed the value of their property, and an US$875 million payment to resolve claims by cooperative and home loan banks among others.

Deutsche Bank's settlement will comprise a different list of recipients, a source close to the matter said, adding that the lender had already settled some claims three years ago.

Citigroup agreed in 2014 to pay US$7 billion to resolve a US government investigation into shoddy mortgage-backed securities the bank sold in the run-up to the 2008 financial crisis, capping months of negotiations, during which the government demanded US$12 billion.

In late 2013, Deutsche Bank agreed to pay US$1.9 billion to settle claims that it defrauded US government-controlled Fannie Mae and Freddie Mac, America's biggest providers of housing finance, into buying US$14.2 billion in mortgage-backed securities before the 2008 financial crisis.

Deutsche was once one of Europe's most successful players on Wall Street. Like many of its peers, it has since faced a slew of lawsuits that often trace back to the boom years before the crash. Its litigation bill since 2012 has already hit more than 12 billion euros.

Claims filed by individuals, companies and regulators against Deutsche, outlined in the bank's 2015 annual report, relate to mis-selling of subprime loans and manipulation of foreign exchange rates or gold and silver prices. Other lawsuits are for the rigging of borrowing benchmarks Libor and Euribor, used to set the price of mortgages and derivatives.

In July, Chief Executive John Cryan said he hoped to close the four largest remaining litigation cases this year. These are the mortgages and FX cases, an investigation into suspicious equities trades in Russia and allegations of money laundering.

Deutsche Bank's overall legal provisions stood at 5.5 billion euros at the end of the second quarter.